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Leased capital and the investment-q relation

Author

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  • Li, Kai
  • You, Linqing

Abstract

Leased capital accounts for a large fraction of U.S. public firms’ total productive physical capital. In this paper, we extend the neoclassical investment q theory with financial frictions by explicitly considering firms’ option to lease. Our model features firms’ optimal buy-versus-lease decisions with collateral constraints and monitoring costs, and gives a strong implication that measured Tobin’s Q has to be adjusted by leased capital. Empirically, we use our model as guidance to construct the lease-adjusted Tobin’s Q, consistent with the recent leasing accounting change (ASC 842). We show that our lease-adjusted Tobin’s Q is a superior proxy for investment opportunities, especially for firms that rent more capital.

Suggested Citation

  • Li, Kai & You, Linqing, 2023. "Leased capital and the investment-q relation," Journal of Corporate Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:corfin:v:80:y:2023:i:c:s0929119923000032
    DOI: 10.1016/j.jcorpfin.2023.102354
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    More about this item

    Keywords

    Investment q theory; Leased capital; Financial frictions;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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